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What is DeFi?
DeFi crypto is an open financial system that runs on software built on a public blockchain. DeFi builds financial products on public decentralized blockchain networks, making them available to any person with an internet connection in any corner of the globe.
DeFi is revolutionizing traditional finance with its innovative features and products by eliminating intermediaries such as brokerages and banks from the financial system. In the place of these expensive and friction-causing middlemen are smart contracts that fulfill an agreement when all stakeholders meet all requirements of a transaction.
What are DeFi crypto smart contracts? Smart contracts automate agreements between lenders and borrowers or sellers and buyers, creating trustless financial systems.
DeFi vs. traditional finance
What is DeFi crypto's main difference with the legacy financial system? The traditional financial system runs via century-old financial institutions and has a vast network of banks, insurance companies, and brokerages. The DeFi network, on the other hand, builds financial products and services on public blockchains promoting and enhancing the development of an open financial system.
DeFi crypto is a blockchain innovation that further fulfills Satoshi Nakamoto's vision of an open, transparent, and secure financial system. Like Bitcoin, the world’s first successful decentralized payment system, DeFi operates outside government and regulatory control.
The Ethereum network’s virtual machine (EVM) and the Solidity programming language first popularized DeFi and smart contracts. The Ethereum network is still a force to reckon with in the DeFi crypto ecosystem. Still, challenger blockchains such as the Binance Smart Chain and Polygon have joined the race, supporting projects that will run a DeFi crypto future.
DeFi
- Uses public blockchains and trustless peer to peer networks as the basis of all its operations;
- Transparent networks, with public distributed ledger technology data storage structures;
- Open to all and unregulated.
Traditional finance
- A centralized governance system whose certified financial institutions are the basis of trust between parties;
- It has a set of privacy and regulatory rules that restrict open access to data and also lockout some users from its network;
- Requires licenses and authorization from regulators.
What are the main DeFi opportunities?
DeFi removes barriers and bureaucracy that come with trusting centralized parties. It builds a digital service that is open, permissionless, and decentralized, opening the financial industry to all. What is DeFi sectors three main opportunities? They are lending, decentralized exchanges, and yield aggregation.
Lending
What is DeFi crypto lending? It is one of the most popular and practical use cases of DeFi. In a DeFi lending system, crypto holders can generate a passive income from their crypto assets by lending their assets to crypto borrowers.
The borrowers then use these cryptocurrency assets to increase their trading liquidity, paying back their crypto loans with interest. The interest then rewards the lender for providing liquidity to the ecosystem.
DeFi loans use loan over-collateralization protocols as a guarantee for loan payments. DeFi lending platforms rely on smart contracts in place of intermediaries. These contracts are self-executing and have several functions within the lending ecosystem. Smart contracts are secure, unbiased, and incapable of independent malicious motive.
Decentralized exchanges
What are DeFi decentralized exchanges? These are autonomous decentralized applications or dApps that support the peer-to-peer trade of cryptocurrencies. DEXs are non-custodial platforms, differing from centralized exchanges that hold custody of user assets.
Automated market makers (AMMs) are the most popular crypto DeFi exchanges. AMMs support the permissionless trading of crypto assets between users by creating a liquidity pool. Their users supply these pools with digital currencies, keeping the automated market maker exchange highly liquid. High liquidity makes the purchase and sale of crypto assets easy, affordable and fast. In addition, the liquidity providers earn fees as an incentive for providing crypto assets.
Yield aggregators
What are DeFi crypto yield aggregators? Yield aggregators use various complex DeFi strategies and protocols to maximize returns on a user's crypto assets, locked within a yield aggregator decentralized application.
Liquidity mining
What is DeFi crypto liquidity mining? Ethereum network has over 200 DeFi projects running on its blockchain. These projects require crypto liquidity to meet their objectives. Fortunately, cryptocurrency hodlers out there could offer these projects the liquidity that they need for a reward. These crypto DeFi projects use liquidity mining to attract and retain these users. Their users receive compensation in a project's native token for providing crypto asset liquidity to a decentralized application.
These tokens could also reward users with governance rights. Most DeFi tokens have a market value that could increase over time. Their users could earn fees for holding them or receive additional tokens over time.
For example, a SushiSwap user that supplies crypto assets to their liquidity pools, e.g.USDT/ETH, will earn pro-rata fees from that liquidity pool and the project's native token (SUSHI).
Yield farming
Yield farming is a phenomenon where DeFi users make more crypto assets using their crypto holdings. They will place their assets in the best yield farming opportunities supplying them with liquidity and earning higher fees and mining rewards in return. DeFi users who relocate their liquidity from one project to another to get better yields are called yield farmers. Yield farmers leverage complex strategies moving their crypto holdings constantly across diverse DeFi projects to maximize their returns.
Stablecoins
Stablecoins are a special class of cryptocurrencies whose value is pegged to another asset class. For example, the most common stablecoin is pegged to the value of the US dollar.
These coins solve the cryptocurrency sector's challenge of price volatility, creating stable-priced assets perfect for everyday use. Tether (USDT), USD Coin (USDC), TrueUSD (TUSD), BinanceUSD (BUSD), and Gemini USD (GUSD) are the most sought-after fiat pegged stablecoins.
DeFi investors, for instance, use stablecoins when lending or borrowing crypto assets in DeFi since they allow them volatility-free market exposure.
How to interact with DeFi projects
Since DeFi protocols are non-custodial, their users need a crypto wallet to interact with them. MetaMask, for instance, is a multi-chain wallet. Moreover, it is a reputable cryptocurrency wallet compatible with Firefox, Chrome, iOS, and the Brave browser.
Its code is open-source, and therefore it is a free wallet. In addition, Crypto software and hardware have built-in coin purchasing capabilities and user interfaces that ease access to DeFi platforms.